EUR/USD continues to trade within the 1.1520–1.1570 price range, whose boundaries correspond to the lower and upper Bollinger Bands on the H4 timeframe. Traders cannot determine the pair's next direction amid conflicting fundamental factors. On one side are macroeconomic reports (NFP, CPI, and PPI), which have weakened the position of dollar bulls and, consequently, sellers of EUR/USD. On the other side is geopolitics, which continues to provide background support for the greenback as a safe-haven asset. These fundamental factors are effectively balancing each other, which is why the pair has remained range-bound for the second consecutive week.
The key macroeconomic releases of the past two weeks have been unfavorable for the dollar. July Nonfarm Payrolls signaled a cooling U.S. labor market, while the CPI and PPI reports reflected easing inflationary pressure.
However, the most important conclusion from the latest releases concerns not so much the slowdown in inflation or labor-market weakness itself, but rather the change in the balance of risks facing the Fed. Just a few weeks ago, the main argument in favor of a rate hike was the threat of a secondary inflationary impulse: high costs, tariff pressures, and elevated energy prices could have kept inflation at elevated levels. That threat now appears less clear-cut.
The July Nonfarm Payrolls report was the first significant signal in favor of revising previous expectations. The U.S. economy lost 23,000 jobs, while the May and June figures were revised down by a combined 103,000. At the same time, the decline in the unemployment rate to 4.1% cannot be considered an unequivocally positive factor, as unemployment fell mainly because of a decline in labor-force participation rather than an acceleration in hiring. In addition, the inflation-sensitive indicator of wages also slowed in July. On a year-on-year basis, this indicator fell to a five-year low of 3.2%.
The inflation reports only reinforced this trend. July CPI increased by just 0.1% month-on-month, while the annual rate declined to 3.4%. At the same time, core CPI rose by 0.2% month-on-month and slowed to 2.5% year-on-year, its lowest level since early 2021. Inflation has certainly not disappeared, but it is no longer showing the acceleration that could force the Fed to act preemptively.
Meanwhile, headline PPI was unchanged month-on-month in July, following a 0.1% decline in June, while the annual rate slowed sharply to 4.7% from 5.5%. Core PPI rose by just 0.2% month-on-month last month, significantly reducing concerns about the pass-through of higher production costs into consumer prices, although some components, particularly services, continue to show noticeable price pressures.
For these reasons, the probability of a Fed rate hike in September has declined significantly. According to the CME FedWatch tool, it is currently estimated at just 30%, whereas as recently as last week, traders had put the probability of policy tightening in early autumn at nearly 70%. Such a sharp revision in expectations appears well justified, as the latest macroeconomic reports have effectively deprived the Fed of one of its main arguments for further monetary policy tightening. Previously, the regulator could justify a rate hike by the need to "contain" the persistent inflationary impulse, but inflationary pressure is now gradually easing. At the same time, the labor market is showing increasingly clear signs of cooling. In this situation, an additional rate hike no longer appears to be an "unambiguously necessary" measure to combat inflation. At the same time, tighter monetary policy would create a risk of excessively slowing the economy and further weakening the labor market.
However, a full shift in expectations toward rate cuts is still some way off. The market will need more than one weak report for dovish expectations to become firmly established. A whole sequence of data will be required: further moderation in core inflation and PCE inflation, further weakening in employment, a rise in unemployment, and slower wage growth. For example, if the August labor-market data confirms the July "turning point" and inflation continues along a downward trajectory, dovish expectations will increase significantly. For now, however, we can speak only of the Fed maintaining a wait-and-see stance and the effective abandonment of the hawkish scenario. This outcome is putting background pressure on the greenback, but the geopolitical factor continues to offset the dollar's weakness, preventing EUR/USD buyers from moving beyond the current range.
Geopolitical tensions continue to fuel risk aversion in global markets. Just today, U.S. Treasury Secretary Bessent stated that Washington would announce new sanctions against Iran next week, "which have never been imposed on any country in the world before." According to him, the measures would combine economic isolation with the continued blockade of the Strait of Hormuz.
Iran, in turn, reiterated its demands to the United States today, the fulfillment of which would allow the strait to be reopened. These include ending the blockade of Iranian ports, unfreezing Iranian assets, and Washington agreeing to a ceasefire throughout the region, including Lebanon and Gaza. Until these demands are met, Tehran intends to keep the strait closed.
Thus, against this backdrop of conflicting fundamental factors, EUR/USD is likely to remain range-bound. Until new signals emerge from the Fed or the U.S.-Iran negotiation process, the pair will most likely continue trading within the established 1.1520–1.1570 price range.
